Lending Standards On Unsecured Lending Tightened By UK Banks


A data that was published today suggest that various banks in the United Kingdom tightened up their lending standards on unsecured loans during the second quarter of the year. This comes after concerns regarding possible “pockets of risk” in the financial system of the United Kingdom were raised.

According to a survey of the Bank of England of banks, the proportion of borrowers who are approved for unsecured loans “fell slightly” during the period of April to June, with the credit scoring criteria discovered to be “significantly harder.”

An index that is tracking the responses of banks discovered that the credit scoring criteria for unsecured loans, excluding credit cards, increased the most since the first quarter of 2009, when the financial crisis was still raging.

Previously, the Bank of England has released a warning that “pockets of risk” may be developing in an otherwise stable environment. Consumer credit has rapidly built up iduring the past few years, with the annual growth breaking above 10 percent for a huge part of the last two years. Consumer credit increased by an annual rate of 8.5 percent in the year to May, which is still many times faster as comapared to the expansion of the economy.

The new data on bank credit revealed a “significant increase” in credit card defaults, which rose at its strongest pace in a year during the second quarter. The expectations of a further increase in defaults also increased, in a warning sign for possible trouble down the road.

The chief economic advisor to the EY Item Club, Howard Archer, stated: “The Bank of England will be pleased to see that lenders expect lending standards to tighten again in the second quarter of 2018, especially for unsecured loan applications.”

He added: “It should also take some comfort from banks reportedly tightening their lending standards for granting unsecured consumer credit.”

Separate data from the banks’ industry body, UK Finance, revealed that strong remortgaging activity drove lending for home purchases last May, as homeowners are quick to lock in low-interest rates ahead of the possible base rate increases.

The members of UK Finance said that approximately 36,000 remortgages were completed in May, 7.1 percent more as compared to the same month in 2017. The figures are compared to 31,100 mortgages for home-movers, and a year-on-year increase of 8.1 percent in the number of first-time buyers, at 32,200.

The director of mortgages at UK Finance, Jackie Bennett, stated: “The mortgage market is seeing a pre-summer boost, driven by a rise in the number of first-time buyers and strong remortgaging activity. It is also particularly encouraging to see an increase in homemovers, after a period of relative sluggishness in this important segment of the market.”

She added: “However, affordability remains a challenge for some prospective buyers and this is reflected by a gradual increase in loan to income multiples.”